Chapter 3 (1/2) Flashcards
Time Period Assumption
presumes an org’s activities can be divided into specific time periods (months, quarters, years, etc)
Accounting Period
span of time over which accting info is reported
Annual Financial Statements
report covering a one-year period
Interim Financial Statements
report covering one, three, or six months of activity
Fiscal Year
consists of 12 consecutive months or 52 consecutive weeks
Natural Business Year
ends when sales are at their lowest level for the year
ex: Target’s nby ends around Jan 31
Accrual Basis Accounting
records revenues when services and products are delivered
records expenses when incurred (matched with revenues)
Cash Basis Accounting
records revenues when cash is received
records expenses when cash is paid
Cash Basis Income equation
(Cash Receipts) - (Cash Payments)
Most agree than ____ basis accting better reflects company performance than ____ basis accting
accrual, cash
Revenue Recognition Principle
revenue is recorded when goods/services are provided to customers and at an an amount expected to be received from customers
Expense Recognition (Matching) Principle
expenses are recorded in the same accting period as revenues that are recnogized as a result of those expenses
Four Types of Adjustments (for transactions/events that extend over more than one period)
- Deferral of Expense
- Deferral of Revenue
- Accrued Expense
- Accrued Revenue
Process to Make Adjustments
- Determine what the account balance equals
- Determine what the account balance should equal
- Record an adjusting entry to get from Step 1 to Step 2
Each adjusting entry at the end of an accounting period reflects a transaction that (is) / (is not yet) recorded
is not yet
An adjusting entry affects how many income statement accts and balance sheet accts
1+ of each, but never cash
Prepaid (Deferred) Expenses
assets paid for in advance of receiving their benefits
when these assets are used, advance payments become expenses
FRAMEWORK: Deferral of Expense
- increases (debits) expenses
- decreases (credits) assets
Plant Assets
also called PP&E;
long term tangible assets used to produce and sell products/services
is a prepaid expense
Do all plant assets depreciate over time?
Not all, land is excluded
Salvage Value
an asset’s expected value at the end of its useful life
Depreciation
the allocation of the costs of assets over their expected useful lives; does not necessarily measure decline in market value
Straight Line Depreciation
allocates equal amounts of the asset’s net cost to depreciate during its useful life
Accumulated Depreciation
a separate contra acct; has a normal credit balance
Contra Account
an acct linked with another acct; has an opposite normal balance to it’s counterpart
is reported as a subtraction from the other acct’s balance
Book Value (Net Amt)
(Asset’s Costs) - (Accumulated Depreciation)
Unearned (Deferred) Revenue
cash received in advance of providing products and services
is a liability
FRAMEWORK: deferral of revenue
- decreases (debits) liability
- increases (credits) revenue
Accrued Expenses (Liabilities)
costs that are incurred in a period that are both unpaid and unrecorded
reported on income statement for the period when incurred
ex: salaries, interest, rent, taxes
FRAMEWORK: accrued expense
- increases (debits) expense)
- increases (credits) liability
Accrued Interest Equ
(Principal Amt Owed) x (Annual Interest Rate) x (Fraction of year since last payment)
ex: $6k loan at 5% annual int…30 day’s accrued interest is $25
($6,000) x (0.05) x (30/360)
Banker’s Rule
interest computations use a 360 day calendar
Accrued Revenues (assets)
revenues earned in a period that are both unrecorded and not yet received in cash (or other assets)
FRAMEWORK: accrued revenue
- increases (debits) asset
- increases (credits) revenue
Accrued Interest Revenue
- interest receivable (asset): DEBIT
- interest revenue (rev): CREDIT
Deferral
paid (or received) cash before expense/revenue recognized
Accrual
paid (or received) cash after expense/revenue recognized
